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Financial Development and Monetary Policy Efficiency

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  • Stefan Krause
  • Felix Rioja

Abstract

We study how financial development is related to short run stabilization. Specifically, our objective is to derive monetary policy efficiency measures (PEMs) for 37 industrialized and developing countries and analyze the impact that the size and depth of the banking sector and the capital sector have on policy performance. It is our contention that a more developed financial sector increases the scope of action of policy, resulting in improved policy performance. In our empirical analysis we use three financial development measures: private credit, liquid liabilities, and a financial aggregate index that comprises banking and stock market measures. Our findings suggest that more developed financial markets, controlling for central bank independence, and inflation targeting and membership to the Economic and European Monetary Union significantly contribute to explaining a more efficient monetary policy implementation.

Suggested Citation

  • Stefan Krause & Felix Rioja, 2006. "Financial Development and Monetary Policy Efficiency," Emory Economics 0613, Department of Economics, Emory University (Atlanta).
    • Handle: RePEc:emo:wp2003:0613
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    Cited by:

    1. International Monetary Fund, 2008. "Is Monetary Policy Effective When Credit is Low?," IMF Working Papers 08/288, International Monetary Fund.
    2. Adina Ardelean & Miguel Leon-Ledesma & Laura Puzzello, 2017. "Industry Volatility and International Trade," Studies in Economics 1709, School of Economics, University of Kent.
    3. Perera, Anil & Ralston, Deborah & Wickramanayake, J., 2014. "Impact of off-balance sheet banking on the bank lending channel of monetary transmission: Evidence from South Asia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 195-216.
    4. Uluc Aysun & Ryan Brady & Adam Honig, 2011. "Financial Frictions and the Credit Channel of Monetary Transmission," Working Papers 2011-03, University of Central Florida, Department of Economics.
    5. repec:tcb:cebare:v:17:y:2017:i:4:p:131-146 is not listed on IDEAS
    6. repec:ebl:ecbull:eb-17-00479 is not listed on IDEAS
    7. Bank for International Settlements, 2009. "Communication of monetary policy decisions by central banks: what is revealed and why," BIS Papers, Bank for International Settlements, number 47, November.
    8. Marc-André Gosselin, 2007. "Central Bank Performance under Inflation Targeting," Staff Working Papers 07-18, Bank of Canada.

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